Hurricane Irma was first born as a loose collection of clouds that gathered into a tropical storm off the African coast. Thousands of miles west, it was blue skies and sunshine in South Florida, where I was taking a break. Days later, Irma was slamming into the Caribbean, and I was scrambling to get out of dodge. In retrospect, Irma will go down as the most powerful Atlantic storm in recorded history. Likewise, in the current market environment, it feels like things just couldn’t be better. And it is no fun to be a Cassandra about stock prices when they continue to hit new highs. Nonetheless, considering risks that may seem very far away is sometimes the prudent thing to do.
Investment professionals worldwide are well aware that equity valuations are overextended. So are corporate executives. Deloitte’s Q2 CFO Signals report found that 78% of surveyed CFOs believe that equity markets are overvalued. Some professionals, including MRP, are increasingly concerned that the risk of a major cyclical market decline is growing. On top of extended valuations, the list of disturbing signs includes the aged bull, extensive retail / high net worth portfolio leverage, trading automation technology, overly bullish sentiment, insider selling, and uncertainty about the Fed. While the exact end date of this long bull market is not knowable, there are many good reasons to be concerned . . .